<?xml version="1.0" encoding="utf-8"?>
<InstanceReport xmlns:xsi="http://www.w3.org/2001/XMLSchema-instance" xmlns:xsd="http://www.w3.org/2001/XMLSchema">
  <Version>2.0.0.10</Version>
  <hasSegments>false</hasSegments>
  <ReportName>Note 7 - Inventories</ReportName>
  <ReportLongName>00906 - Disclosure - Note 7 - Inventories</ReportLongName>
  <DisplayLabelColumn>true</DisplayLabelColumn>
  <ShowElementNames>false</ShowElementNames>
  <RoundingOption />
  <HasEmbeddedReports>false</HasEmbeddedReports>
  <Columns>
    <Column>
      <LabelColumn>false</LabelColumn>
      <Id>1</Id>
      <Labels>
        <Label Id="1" Label="12 Months Ended" />
        <Label Id="2" Label="Dec. 31, 2009" />
      </Labels>
      <CurrencyCode>usd</CurrencyCode>
      <CurrencySymbol>$</CurrencySymbol>
      <FootnoteIndexer />
      <hasSegments>false</hasSegments>
      <hasScenarios>false</hasScenarios>
      <Segments />
      <Scenarios />
      <Units>
        <Unit>
          <UnitID>Dollars</UnitID>
          <UnitType>Standard</UnitType>
          <StandardMeasure>
            <MeasureSchema>http://www.xbrl.org/2003/iso4217</MeasureSchema>
            <MeasureValue>USD</MeasureValue>
            <MeasureNamespace>iso4217</MeasureNamespace>
          </StandardMeasure>
          <Scale>0</Scale>
        </Unit>
        <Unit>
          <UnitID>Shares</UnitID>
          <UnitType>Standard</UnitType>
          <StandardMeasure>
            <MeasureSchema>http://www.xbrl.org/2003/instance</MeasureSchema>
            <MeasureValue>shares</MeasureValue>
            <MeasureNamespace>xbrli</MeasureNamespace>
          </StandardMeasure>
          <Scale>0</Scale>
        </Unit>
      </Units>
    </Column>
  </Columns>
  <Rows>
    <Row>
      <Id>2</Id>
      <Label>Notes to Financial Statements [Abstract]</Label>
      <Level>0</Level>
      <ElementName>pbra_NotesToFinancialStatementsAbstract</ElementName>
      <ElementPrefix>pbra</ElementPrefix>
      <IsBaseElement>false</IsBaseElement>
      <BalanceType>na</BalanceType>
      <PeriodType>duration</PeriodType>
      <ElementDataType>string</ElementDataType>
      <ShortDefinition>No definition available.</ShortDefinition>
      <IsReportTitle>false</IsReportTitle>
      <IsSegmentTitle>false</IsSegmentTitle>
      <IsSubReportEnd>false</IsSubReportEnd>
      <IsCalendarTitle>false</IsCalendarTitle>
      <IsTuple>false</IsTuple>
      <IsAbstractGroupTitle>true</IsAbstractGroupTitle>
      <IsEquityPrevioslyReportedAsRow>false</IsEquityPrevioslyReportedAsRow>
      <IsEquityAdjustmentRow>false</IsEquityAdjustmentRow>
      <IsBeginningBalance>false</IsBeginningBalance>
      <IsEndingBalance>false</IsEndingBalance>
      <IsReverseSign>false</IsReverseSign>
      <PreferredLabelRole />
      <IsEPS>false</IsEPS>
      <FootnoteIndexer />
      <Cells>
        <Cell>
          <Id>1</Id>
          <ShowCurrencySymbol>false</ShowCurrencySymbol>
          <IsNumeric>false</IsNumeric>
          <IsRatio>false</IsRatio>
          <DisplayZeroAsNone>false</DisplayZeroAsNone>
          <NumericAmount>0</NumericAmount>
          <RoundedNumericAmount>0</RoundedNumericAmount>
          <NonNumbericText />
          <NonNumericTextHeader />
          <FootnoteIndexer />
          <hasSegments>false</hasSegments>
          <hasScenarios>false</hasScenarios>
          <DisplayDateInUSFormat>false</DisplayDateInUSFormat>
        </Cell>
      </Cells>
      <OriginalInstanceReportColumns />
      <ElementDefenition>No definition available.</ElementDefenition>
      <IsTotalLabel>false</IsTotalLabel>
    </Row>
    <Row>
      <Id>3</Id>
      <Label>Note 7 - Inventories</Label>
      <Level>1</Level>
      <ElementName>us-gaap_InventoryDisclosureTextBlock</ElementName>
      <ElementPrefix>us-gaap</ElementPrefix>
      <IsBaseElement>true</IsBaseElement>
      <BalanceType>na</BalanceType>
      <PeriodType>duration</PeriodType>
      <ElementDataType>string</ElementDataType>
      <ShortDefinition>No definition available.</ShortDefinition>
      <IsReportTitle>false</IsReportTitle>
      <IsSegmentTitle>false</IsSegmentTitle>
      <IsSubReportEnd>false</IsSubReportEnd>
      <IsCalendarTitle>false</IsCalendarTitle>
      <IsTuple>false</IsTuple>
      <IsAbstractGroupTitle>false</IsAbstractGroupTitle>
      <IsEquityPrevioslyReportedAsRow>false</IsEquityPrevioslyReportedAsRow>
      <IsEquityAdjustmentRow>false</IsEquityAdjustmentRow>
      <IsBeginningBalance>false</IsBeginningBalance>
      <IsEndingBalance>false</IsEndingBalance>
      <IsReverseSign>false</IsReverseSign>
      <PreferredLabelRole />
      <IsEPS>false</IsEPS>
      <FootnoteIndexer />
      <Cells>
        <Cell>
          <Id>1</Id>
          <ShowCurrencySymbol>false</ShowCurrencySymbol>
          <IsNumeric>false</IsNumeric>
          <IsRatio>false</IsRatio>
          <DisplayZeroAsNone>false</DisplayZeroAsNone>
          <NumericAmount>0</NumericAmount>
          <RoundedNumericAmount>0</RoundedNumericAmount>
          <NonNumbericText>&lt;p style="TEXT-ALIGN: left"&gt;&lt;b&gt;7.&amp;nbsp;&amp;nbsp;&amp;nbsp;Inventories&lt;/b&gt;&lt;/p&gt;
&lt;div align="left"&gt;
  &lt;table style="WIDTH: 100%; FONT-FAMILY: ''''''''''''Times New Roman''''''''''''; FONT-SIZE: 9pt" border="0" cellspacing="0"&gt;
    &lt;tr&gt;
      &lt;td&gt;&lt;/td&gt;
      &lt;td width="1%"&gt;&lt;/td&gt;
      &lt;td width="13%"&gt;&lt;/td&gt;
      &lt;td width="1%"&gt;&lt;/td&gt;
      &lt;td width="13%"&gt;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td align="left"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td colspan="3" align="center"&gt;&lt;b&gt;As of December&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td align="left"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 1px solid" colspan="3" align="center"&gt;&lt;b&gt;31,&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td align="left"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 1px solid; TEXT-INDENT: 1px" align="center"&gt;&lt;b&gt;2009&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 1px solid" align="center"&gt;&lt;b&gt;2008&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr&gt;
      &lt;td colspan="5"&gt;&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff" align="left"&gt;Products:&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff" align="left"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff" align="left"&gt;&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td style="TEXT-INDENT: 2px" align="left"&gt;&amp;nbsp;&amp;nbsp;&amp;nbsp;Oil products&amp;nbsp;&lt;/td&gt;
      &lt;td&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td align="right"&gt;&lt;b&gt;3,379&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td align="right"&gt;2,770&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff; TEXT-INDENT: 2px" align="left"&gt;&amp;nbsp;&amp;nbsp;&amp;nbsp;Fuel alcohol&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 1px solid; BACKGROUND-COLOR: #cceeff" align="right"&gt;&lt;b&gt;377&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 1px solid; BACKGROUND-COLOR: #cceeff" align="right"&gt;256&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr&gt;
      &lt;td colspan="5"&gt;&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff" align="left"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 1px solid; BACKGROUND-COLOR: #cceeff" align="right"&gt;&lt;b&gt;3,756&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 1px solid; BACKGROUND-COLOR: #cceeff" align="right"&gt;3,026&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr&gt;
      &lt;td colspan="5"&gt;&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff" align="left"&gt;Raw materials, mainly crude oil&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff" align="right"&gt;&lt;b&gt;5,494&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff" align="right"&gt;3,301&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td align="left"&gt;Materials and supplies&amp;nbsp;&lt;/td&gt;
      &lt;td&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td align="right"&gt;&lt;b&gt;1,917&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td align="right"&gt;1,578&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff" align="left"&gt;Others&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 1px solid; BACKGROUND-COLOR: #cceeff" align="right"&gt;&lt;b&gt;75&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 1px solid; BACKGROUND-COLOR: #cceeff" align="right"&gt;134&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr&gt;
      &lt;td colspan="5"&gt;&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff" align="left"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 3px double; BACKGROUND-COLOR: #cceeff" align="right"&gt;&lt;b&gt;11,242&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 3px double; BACKGROUND-COLOR: #cceeff" align="right"&gt;8,039&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr&gt;
      &lt;td colspan="5"&gt;&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff" align="left"&gt;Current inventories&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 3px double; BACKGROUND-COLOR: #cceeff" align="right"&gt;&lt;b&gt;11,227&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 3px double; BACKGROUND-COLOR: #cceeff" align="right"&gt;7,990&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr&gt;
      &lt;td colspan="5"&gt;&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
    &lt;tr valign="bottom"&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff" align="left"&gt;Long-term inventories&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 3px double; BACKGROUND-COLOR: #cceeff" align="right"&gt;&lt;b&gt;15&lt;/b&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BACKGROUND-COLOR: #cceeff"&gt;&amp;nbsp;&lt;/td&gt;
      &lt;td style="BORDER-BOTTOM: #000000 3px double; BACKGROUND-COLOR: #cceeff" align="right"&gt;49&amp;nbsp;&lt;/td&gt;
    &lt;/tr&gt;
  &lt;/table&gt;
&lt;/div&gt;
&lt;p style="MARGIN: 0px"&gt;&amp;nbsp;&lt;/p&gt;
&lt;p style="TEXT-ALIGN: left; MARGIN-LEFT: 0.2in"&gt;Inventories are stated at the lower of cost or market. Due to the recently declines in the oil international market prices, the Company recognized a loss of US$308 for the year ended December 31, 2009 (US$545 in 2008), which was classified as other operating expenses in the consolidated statement of income. The Company adopted the realizable value for inventory impairment purposes.&lt;/p&gt;</NonNumbericText>
          <NonNumericTextHeader>7.&amp;nbsp;&amp;nbsp;&amp;nbsp;Inventories










      &amp;nbsp;
      &amp;nbsp;
      As of December&amp;nbsp;


     </NonNumericTextHeader>
          <FootnoteIndexer />
          <hasSegments>false</hasSegments>
          <hasScenarios>false</hasScenarios>
          <DisplayDateInUSFormat>false</DisplayDateInUSFormat>
        </Cell>
      </Cells>
      <OriginalInstanceReportColumns />
      <ElementDefenition>This element represents the complete disclosure related to inventory. This may include, but is not limited to, the basis of stating inventory, the method of determining inventory cost, the major classes of inventory, and the nature of the cost elements included in inventory. If inventory is stated above cost, accrued net losses on firm purchase commitments for inventory and losses resulting from valuing inventory at the lower-of-cost-or-market may also be included. For LIFO inventory, may disclose the amount and basis for determining the excess of replacement or current cost over stated LIFO value and the effects of a LIFO quantities liquidation that impacts net income.</ElementDefenition>
      <ElementReferences>Reference 1: http://www.xbrl.org/2003/role/presentationRef
 -Publisher AICPA
 -Name Accounting Research Bulletin (ARB)
 -Number 43
 -Chapter 3
 -Section A
 -Paragraph 9

Reference 2: http://www.xbrl.org/2003/role/presentationRef
 -Publisher SEC
 -Name Regulation S-X (SX)
 -Number 210
 -Section 02
 -Paragraph 6
 -Subparagraph a, b, c
 -Article 5

</ElementReferences>
      <IsTotalLabel>false</IsTotalLabel>
    </Row>
  </Rows>
  <Footnotes />
  <ComparabilityReport>false</ComparabilityReport>
  <NumberOfCols>1</NumberOfCols>
  <NumberOfRows>2</NumberOfRows>
  <HasScenarios>false</HasScenarios>
  <MonetaryRoundingLevel>UnKnown</MonetaryRoundingLevel>
  <SharesRoundingLevel>UnKnown</SharesRoundingLevel>
  <PerShareRoundingLevel>UnKnown</PerShareRoundingLevel>
  <HasPureData>false</HasPureData>
  <SharesShouldBeRounded>true</SharesShouldBeRounded>
</InstanceReport>
